Need to close down your Illinois nonprofit corporation? Here’s a quick overview of the main steps to dissolve and wind up a 501(c)(3) nonprofit corporation under Illinois law.
Closing starts with dissolution, and to dissolve your nonprofit, you will need a resolution to dissolve. With the resolution in hand, Illinois law provides for voluntary dissolution as follows:
Under the first method, the members alone are able to approve the dissolution if they all provide their written consent. In this case, no action by the board is necessary.
Under the second method, the board first must adopt the resolution and then submit it to the members. The members then generally meet and vote to approve the dissolution. Alternatively, after the board’s submission, members can provide written consent for the dissolution. (Unlike the first listed method, here members’ written consent might not need to be unanimous).
Under the third method, which covers cases where there are no members entitled to vote on dissolution, it is up to the board alone to authorize the dissolution. However, to use this method, your nonprofit cannot have any unpaid debts. The default rule is that approval is by majority vote of the directors. Alternatively, the board can approve dissolution if all directors give their written consent.
Make sure to properly record the resolution to dissolve, directors’ votes or written consents, and members’ votes or written consents. You’ll need this information for filings with the state and the IRS.
Plan of Distribution
Apart from the resolution to dissolve, you’ll also need to adopt a plan of distribution. The plan will indicate how the nonprofit’s remaining assets will be distributed after all creditors have been paid. You can adopt the plan of distribution in one of the following ways:
You should properly record your plan of distribution, including the votes or consents regarding its adoption, and have the plan available for filings with the state and the IRS.
Articles of Dissolution
After your board and, where applicable, voting members, have approved the dissolution, you’ll need to submit articles of dissolution to the Secretary of State (SOS). The articles of dissolution must contain:
A blank form for the articles of dissolution (Form NFP 112.20) is available for download from the SOS website. There is a minimum $5 filing fee.
After your nonprofit has formally authorized dissolution, it continues to exist only for the purpose of taking care of certain final matters that, collectively, are known as “winding up” the company. Winding up is largely about paying off any debts and then distributing any remaining assets, but there may also be other tasks involved.
Generally speaking, you can only distribute money and property after you have paid off all of your nonprofit’s debts. Then, for asset distributions, there are specific rules you need to follow. For example, your nonprofit must return any items that were loaned to it on the condition that they would be returned upon dissolution. In addition, after paying off debts and returning loaned assets, a dissolving 501(c)(3) organization must distribute its remaining assets for tax-exempt purposes. In practice, this usually means distributing assets to one or more other 501(c)(3) organizations. Other requirements for distributions, including items in your articles of incorporation, bylaws, or plan of distribution, may also apply. If you have any questions, you should consult with a lawyer.
Notice to Creditors and Other Claimants
One other part of winding up your dissolved nonprofit involves giving notice to creditors and other claimants. Giving notice is optional. However, doing so will help limit your liability and also allow you to more safely make final distributions of remaining assets. You can mail notice directly to known claimants after dissolution.
Federal Tax Note
For federal tax purposes, you’ll need to file IRS Form 990 or IRS Form 990-EZ. You must include a completed Schedule N (Liquidation, Termination, Dissolution, or Significant Disposition of Assets), as well as copies of your articles of dissolution, resolution to dissolve, and plan of distribution. When completing Form 990 or Form 990-EZ, you’ll need to check the “Terminated” box in the header area on Page 1 of the return. For additional guidance, check out Every Nonprofit’s Tax Guide, by Stephen Fishman (Nolo), go to the IRS website, or consult with a tax professional.
You can find additional information, such as forms, mailing addresses, phone numbers, and filing fees, on the SOS website.
Be aware that dissolution will not stop lawsuits started by or against your nonprofit before dissolution. Moreover, for claims or liability incurred prior to dissolution, it may be possible to start new legal actions up to two years after dissolution.
This article covers only the most basic steps of voluntary dissolution after your nonprofit has started doing business. There are many additional, more specific rules, covering things like:
In addition, your articles of incorporation or bylaws may contain rules that apply instead of, or along with, state law (for example, as regards the number of member votes needed to approve dissolution). You are strongly encouraged to consult with a lawyer to obtain additional information on these and other points.
Final Note: Dissolving and winding up your nonprofit corporation is only one piece of the process of closing your organization. For further, general guidance on many of the other steps involved, check Nolo’s 20-point checklist for closing a business and the Nolo article on what you need to know about closing a business.